What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-14 · 117 added, 169 removed, 233 unchanged (55% of the section changed)

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● any slow-down or unanticipated development in the market for programmatic advertising campaigns;

● the effects of health epidemics, such as the ongoing global COVID-19 pandemic;

● the effects of health epidemics;

● operational and performance issues with our platform, whether real or perceived, including a failure to respond to technological changes or to upgrade our technology systems;

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Should one or more of these risks or uncertainties materialize or should any of these assumptions prove to be incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements.

after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

New factors that could cause our business not to develop as we expect emerge from time to time, and it is not possible for us to predict all of them.

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Colossus Media is our proprietary sell-side programmatic platform operating under the trademarked banner of Colossus SSP™ (“Colossus SSP”).

Colossus SSP is a stand-alone tech-enabled, data-driven sell-side platform (“SSP”) that helps deliver targeted advertising to diverse and multicultural audiences, including African Americans, Latin Americans, Asian Americans and LGBTQ+ customers, as well as other specific audiences.

Providing both the front-end, buy-side advertising businesses coupled with our proprietary sell-side business, enables us to curate the first through the last mile in the ad tech ecosystem execution process to drive higher results.

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On the buy-side of our business, our customers consist of purchasers of programmatic advertising inventory (ad space) looking to place their advertisements.

We serve the needs of approximately 200 small and mid-sized clients annually, consisting of advertising space buyers, including small and mid-sized companies, large advertising holding companies (which may manage several agencies),

independent advertising agencies and mid-market advertising service organizations.

We serve the needs of approximately 231 small and mid-sized clients annually, consisting of advertising space buyers, including small and mid-sized companies, large advertising holding companies (which may manage several agencies), independent advertising agencies and mid-market advertising service organizations.

We serve a variety of customers across multiple industries including travel/tourism (including destination marketing organizations (“DMOs”)), energy, consumer packaged goods, healthcare, education, financial services (including cryptocurrency technologies) and other industries.

We are focused on increasing the number of customers that use our buy-side advertising businesses for their advertising partner.

We are focused on increasing the number of customers that use our buy-side advertising businesses as their advertising partner.

Our long-term growth and results of operations will depend on our ability to attract more customers, including DMOs, across multiple geographies.

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We are technology, DSP and media agnostic, and we believe our clients trust us to provide the best opportunity for success of their brands and businesses.

As a result, our clients have been loyal, with approximately 90% client retention amongst the clients that represent approximately 80% of our revenue on an annual basis during the year ended December 31, 2021 and the nine months ended September 30, 2022.

As our clients expand their usage of our technology platform, they often transition to our managed services delivery model, which in turn drives higher profitability for us, as well as increased client loyalty.

In addition, we cultivate client relationships through our pipeline of managed and moderate/self-serve clients that conduct campaigns through our platform.

The managed services delivery model allows us to combine our technology with a highly personalized offering to strategically design and manage advertising campaigns.

Shift to Digital Advertising

Media has increasingly become more digital as a result of three key items:

Media has increasingly become more digital as a result of three key ongoing developments:

● Advances in technology with more sophisticated digital content delivery across multiple platforms;

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Only recently have small and mid-sized businesses begun to leverage the power of digital media in meaningful ways, as emerging technologies have enabled advertising across multiple channels in a highly localized nature.

Campaign efficiencies yielding measurable results and higher advertising ROI, as well as the needs necessitated by the COVID-19 pandemic, have prompted these companies to begin utilizing digital advertising on an accelerated pace.

Campaign efficiencies yielding measurable results and higher advertising ROI, as well as the needs necessitated by the COVID-19 pandemic, have prompted these companies to

begin utilizing digital advertising on an accelerated pace.

We believe this market is rapidly expanding, and that small-to-mid-sized advertisers will continue to increase their digital spend.

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The buyers on our platform include DSPs, agencies and individual advertisers.

We have broad exposure to the ecosystem of buyers, reaching on average approximately 54,000 advertisers per month in the nine months ended September 30, 2021, which increased to an average of approximately 95,000 advertisers per month in the nine months ended September 30, 2022.

We have broad exposure to the ecosystem of buyers, reaching on average approximately 153,000 advertisers per month in the three months ended March 31, 2023, an increase of 121% over the 69,000 advertisers per month in the three months ended March 31, 2022.

As spending on programmatic advertising increasingly becomes a larger share of the overall ad spend, advertisers and agencies are seeking greater control of their digital advertising supply chains.

To take advantage of this industry shift, we have entered into Supply Path Optimization agreements directly with buyers.

As part of these agreements, we are providing advertisers and agencies with benefits ranging from custom data and workflow integrations, product features, volume-based business terms, and visibility into campaign performance data and methodology.

As part of these agreements, we provide advertisers and agencies with benefits ranging from custom data and workflow integrations, product features, volume-based business terms, and visibility into campaign performance data and methodology.

As a result of these direct relationships, our existing advertisers and agencies are incentivized to allocate an increasing percentage of their advertising budgets to our platform.

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Each time the publisher’s web page loads, an ad request is sent to multiple ad exchanges and, in some cases, to the demand side platform directly from Colossus SSP.

In case of real-time bidding (or RTB) media buys, many DSPs would place bids to the impressions being offered by the publisher during the auction.

In case of real-time bidding (“RTB”) media buys, many DSPs would place bids to the impressions being offered by the publisher during the auction.

The advertiser that bids a higher amount compared to other advertisers will win the bid and pay the second highest price for the winning impression to serve the ads.

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Enhancing ad inventory quality

In MediaMath’s quarterly survey, Colossus Media has consistently ranked in the top 10 among the industry’s approximately 80 supply- side companies in terms of key quality measures such as transparency, fraud detection, and accountability.

In the advertising industry, inventory quality is assessed in terms of invalid traffic (“IVT”) which can be impacted by fraud such as “fake eyeballs” generated by automated technologies set up to artificially inflate impression counts.

As a result of our platform design and proactive IVT mitigation efforts, in the nine months ended September 30, 2022, we determined that less than 1% of inventory was invalid, resulting in minimal financial impact to our customers.

As a result of our platform design and proactive IVT mitigation efforts, in the three months ended March 31, 2023, we determined that approximately 1% of inventory was invalid, resulting in minimal financial impact to our customers.

We address IVT on a number of fronts, including sophisticated technology, which detects and avoids IVT on the front end;

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Our performance is affected by our ability to maintain and grow our access to valuable ad impressions from current publishers as well as through new relationships with publishers.

For the nine months ended September 30, 2022, we processed approximately 2.6 trillion bid requests and had connections to approximately 19 DSPs.

Expanding and managing investments

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We automate workflow processes whenever feasible to drive predictable and value-added outcomes for our customers and increase productivity of our organization.

In the first quarter of 2023, we expect to transition our server platform to HPE Greenlake, which we expect will provide increased capacity, faster response time, and expansion capabilities to align with growth in our business.

In the first quarter of 2023, we transitioned our server platform to HPE Greenlake, which provides increased capacity, faster response time, and expansion capabilities to align with growth in our business.

Managing industry dynamics

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For the sell-side advertising segment, we pay publishers a fee, which is typically a percentage of the value of the ad impressions monetized through our platform.

Cost of revenues consists primarily of publisher media fees and data center co-location costs.

Cost of revenues consists

primarily of publisher media fees and data center co-location costs.

Media fees include the publishing and real time bidding costs to secure advertising space.

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Other income includes income associated with recovery of receivables and other miscellaneous credit card rebates.

Forgiveness of Paycheck Protection Program Loan.

From time to time, we obtain loans pursuant to the Paycheck Protection Program (“PPP”), administered by the U.S.

Small Business Administration (“SBA”).

Forgiveness of PPP loans is recognized as a gain in the period it is granted.

We received the PPP-1 Loan proceeds of $287,100 on May 8, 2020.

On February 16, 2021, the remaining $10,000 balance of the PPP-1 Loan was forgiven.

In March 2021, DDH LLC received the PPP-2 Loan proceeds of $287,143.

On April 11, 2022, the balance on the PPP-2 Loan was forgiven.

Interest expense.

Interest expense is mainly related to our debt as further described below in “ - Liquidity and Capital Resources .” In connection with the acquisition of Orange142, we issued mandatorily redeemable non-participating preferred A and B units, and in accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity , the value of these units are classified as a liability, and the corresponding distributions are recognized as interest expense.

Interest expense is mainly related to our debt as further described below in “ - Liquidity and Capital Resources .” In connection with the acquisition of Orange142, we issued mandatorily redeemable non-participating preferred A and B units, and in accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity , the value of these units is classified as a liability, and the corresponding distributions are recognized as interest expense for the three months ended March 31, 2022.

The preferred A and B units were fully redeemed as of March 31, 2022.

Contingent loss on early termination of line of credit.

In January 2023, we entered into a Loan and Security Agreement (the “Loan Agreement”), by and among Silicon Valley Bank (“SVB”), which provides for a revolving credit facility (the “Credit Facility”).

In March 2023, we issued a notice of termination and recognized a loss on the write-off of the deferred financing fees.

Loss on early redemption of non-participating preferred units.

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

Comparison of the Three Ended March 31, 2023 and 2022

The following tables set forth our consolidated results of operations for the periods presented.

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For the Three Months Ended

For the Nine Months Ended

September 30,

Buy-side advertising

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Operating expenses

Income from operations

Income (loss) from operations

Other expense

Income before taxes

Net income (loss)

Loss before taxes

Adjusted EBITDA (1)

(1) Adjusted EBITDA is a non-GAAP financial measure.

For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure, and a reconciliation of Adjusted EBITDA to net income see “ – Non-GAAP Financial Measures .”

Our revenues increased from $8.4 million for the three months ended September 30, 2021 to $26.0 million for the three months ended September 30, 2022, an increase of $17.6 million or 211%.

Buy-side advertising revenue increased $1.1 million, or 18%, primarily due to expanded spending from our existing customer base as well as new middle market client spending.

Sell-side advertising revenue increased $16.6 million, or 710% over the 2021 three-month results, due to continued revenue growth momentum from enhanced publisher partner engagement and monetization strategies, an increase in impression inventory, as well as the extension of our reach into the underserved and underrepresented publisher communities.

For the three months ended September 30, 2022, the Company processed approximately 125 billion average monthly impressions through its sell-side advertising segment, an increase of 248% from the prior year.

Our revenues increased from $25.2 million in for the nine months ended September 30, 2021 to $58.6 million for the nine months ended September 30, 2022, an increase of $33.4 million, or 132%.

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Our revenues increased from $11.4 million for the three months ended March 31, 2022 to $21.2 million for the three months ended March 31, 2023, an increase of $9.9 million or 87%.

Buy-side advertising revenue increased $1.6 million, or 28%, primarily due to expanded spending from our existing customer base as well as new middle market client spending.

Sell-side advertising revenue increased $31.1 million, or 591% over the 2021 nine-month results due to continued revenue growth momentum from enhanced publisher partner engagement and monetization strategies, an increase in impression inventory, as well as the extension of our reach into the underserved and underrepresented publisher communities.

For the nine months ended September 30, 2022, the Company processed approximately 104 billion average monthly impressions, through its sell-side advertising segment, an increase of 165% from the prior year.

Sell-side advertising revenue increased $8.3 million, or 149% over the 2022 three-month results, due to a continued increase in impression inventory, as well as increased publisher engagement across general market and underrepresented publisher communities.

Cost of revenues

Along with the increase in revenues across both segments, we correspondingly experienced an increase in cost of revenues from $4.1 million for the three months ended September 30, 2021 to $18.5 million for the three months ended September 30, 2022, an increase of $14.4 million or 349%.

Buy-side advertising cost of revenues increased $0.3 million to $2.5 million, or 35% of revenue, for the three months ended September 30, 2022 due to the increase in revenue partially offset by lower media costs, compared to $2.2 million or 36% of revenue for the three months ended September 30, 2021.

Sell-side advertising cost of revenues increased $14.1 million, to $16.0 million, or 85% of revenue for the three months ended September 30, 2022, compared to $2.0 million, or 84% of revenue, for the same period in 2021.

Cost of revenues increased from $11.8 million for the nine months ended September 30, 2021 to $38.0 million for the nine months ended September 30, 2022, an increase of $26.2 million, or 222%.

Buy-side advertising cost of revenues increased $0.2 million to $7.7 million, or 35% of revenue for the nine months ended September 30, 2022, compared to $7.5 million, or 37% of revenue for the nine months ended September 30, 2021.

The increase in the buy-side of cost of revenues is due to the increase in revenues partially offset by a decrease in the cost of digital media in the nine months ended September 30, 2022.

Sell-side advertising cost of revenues increased $26.0 million, to $30.3 million, or 84% of revenue for the nine months ended September 30, 2022, compared to $4.3 million, or 83% of revenue, for the same period in 2021.

Gross profit also increased in the three months ended September 30, 2022 to $7.5 million, or 29% of revenue, compared to $4.2 million, or 49% of revenue, for the three months ended September 30, 2021, an increase of $3.2 million or 76%.

Gross profit also increased in the nine months ended September 30, 2022 to $20.6 million, or 35% of revenue, compared to $13.4 million, or 53% of revenue, for the nine months ended September 30, 2021, an increase of $7.2 million or 53%.

The change in margin for the three and nine months ended September 30, 2022 is attributable to the mix in revenue between our business segments, as our sell-side segment, whose revenues grew as a percentage of our overall revenue, has a lower gross margin than our buy-side segment.

Buy-side advertising gross profit increased $0.8 million and $2.1 million for three and nine months ended September 30, 2022, respectively, as compared to prior the same periods in the prior year.

This increase is primarily due to a lower cost of media advertising, as well as higher revenue.

Sell-side advertising gross profit increased $2.5 million and $5.1 million for the three and nine months ended September 30, 2022, respectively, as compared to prior year.

This increase primarily is a result of the increase in revenue since the gross margins are relatively flat period over period.

Along with the increase in revenues across both segments, we correspondingly experienced an increase in cost of revenues from $6.6 million for the three months ended March 31, 2022 to $14.8 million for the three months ended March 31, 2023, an increase of $8.2 million, or 124%.

Buy-side advertising cost of revenues increased $0.9 million to $2.9 million, or 40% of revenue, for the three months ended March 31, 2023, compared to $2.1 million, or 35% of revenue, for the three months ended March 31, 2022.

Sell-side advertising cost of revenues increased $7.3 million, to $11.8 million, or 86% of revenue for the three months ended March 31, 2023, compared to $4.5 million, or 82% of revenue, for the same period in 2022.

The increase in costs was primarily due to the related increase in revenue, while the 4% increase as a percentage of revenue was due to the mix and concentration of publishers and the related costs.

We expect these higher costs to continue in future fiscal periods.

Gross profit also increased in the three months ended March 31, 2023 to $6.4 million, or 30% of revenue, compared to $4.8 million, or 42% of revenue, for the three months ended March 31, 2022, an increase of $1.7 million or 35%.

The change in margin for the three months ended March 31, 2023 is attributable to the mix in revenue between our business segments, as our sell-side segment, whose revenues grew as a percentage of our overall revenue, has a lower gross margin than our buy-side segment.

Buy-side advertising gross profit increased $0.7 million for the three months ended March 31, 2023 as compared to the same period in the prior year, primarily due higher revenue.

Sell-side advertising gross profit increased $0.9 million for the three months ended March 31, 2023 as compared to prior year, primarily due to the increase in revenue.

Operating expenses

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For the Three Months Ended

For the Nine Months Ended

September 30,

Compensation, tax and benefits

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Compensation, taxes and benefits

Compensation, taxes and benefits increased from $2.2 million for the three months ended September 30, 2021 to $3.8 million in for the three months ended September 30, 2022, an increase of $1.6 million, or 72%.

The increase is due to a one-time severance charge of $0.5 million, as well as headcount additions primarily in our operations area to support our growth, and higher commission expense and bonus expense, partially offset by lower consulting expenses as a result of these consultants being converted to full-time employees.

Compensation, taxes and benefits increased from $6.1 million for the nine months ended September 30, 2021 to $9.9 million in for the nine months ended September 30, 2022, an increase of $3.8 million, or 61%.

Compensation, taxes and benefits increased from $2.6 million for the three months ended March 31, 2022 to $3.6 million in for the three months ended March 31, 2023, an increase of $1.1 million, or 42%.

The increase is due to headcount additions primarily in our operations area to support our growth as well as in our shared services to support our public company infrastructure and bonus expense.

In connection with our IPO, the Company adopted the 2022 Omnibus Incentive Plan (“2022 Omnibus Plan”) to facilitate the grant of equity awards to our employees, consultants and non-employee directors.

On June 10, 2022 and March 20, 2023, our board of directors granted stock options and restricted stock units (“RSUs”) to certain of our employees and non-employee directors.

The stock options and RSUs granted did not have a material impact to compensation, taxes and benefits expense for the three months ended March 31, 2023.

We expect to continue to invest in corporate infrastructure and incur additional expenses associated with our transition to and operation as a public company, including increased compensation associated with additional headcount to support our sales initiatives.

General and administrative expenses

General and administrative (“G&A”) expenses also increased from $1.4 million for the three months ended September 30, 2021 to $1.8 million for the three months ended September 30, 2022.

G&A expenses as a percentage of revenue was 7% for the three months ended September 30, 2022, compared to 17% for the three months ended September 30, 2021.

G&A expenses increased from $4.2 million for the nine months ended September 30, 2021 to $5.2 million for the nine months ended September 30, 2022.

G&A expenses as a percentage of revenue was 9% for the nine months ended September 30, 2022, compared to 17% for the nine months ended September 30, 2021.

The increase in G&A costs during the three and nine months ended September 30, 2022 was primarily due to costs associated with our transition to and operation as a public company.

During the three and nine months ended September 30, 2022, we invested in systems, increased insurance, incurred additional software fees, and professional fees.

General and administrative (“G&A”) expenses also increased from $1.6 million for the three months ended March 31, 2022 to $2.9 million for the three months ended March 31, 2023.

G&A expenses as a percentage of revenue was 14% for the three months ended March 31, 2023 and 2022.

The increase in G&A costs during the three months ended March 31, 2023 was primarily due to costs associated with our transition to and operation as a public company as of February 2022.

During the three months ended March 31, 2023, we incurred higher travel expenses, investor and public relations costs, insurance, as well as professional fees.

We also completed the transition of our servers for Colossus Media to HPE Greenlake and incurred higher consulting and transition costs for this one-time project.

We expect to continue to invest in and incur additional expenses associated with our transition to operating as a public company, including increased professional fees, investment in automation, and compliance costs associated with developing the requisite infrastructure required for internal controls.

On June 10, 2022, our board of directors granted stock options and restricted stock units (“RSUs”) to our employees and non-employee directors.

The stock options and RSUs granted did not have a material impact to G&A expense for the three and nine months ended, September 30, 2022.

Other income (expense)

The following table sets forth the components of other income (expense) for the periods presented.

For the Three Months Ended

For the Nine Months Ended

September 30,

Forgiveness of Paycheck Protection Program loan

Loss on redemption of non-participating preferred units

Gain from revaluation and settlement of seller notes and earnout liability

Contingent loss on early termination of line of credit

Loss on early redemption of non-participating preferred units

Interest expense

Total other expense

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Other expense for the three months ended September 30, 2022 primarily consists of $0.9 million of interest expense.

Other expense for the three months ended September 30, 2021 is comprised of approximately $0.8 million of interest expense.

Other expense for the nine months ended September 30, 2022 primarily consists of $0.6 million associated with the loss on the early redemption of DDH LLC’s previously outstanding Class B Preferred Units and $2.3 million of interest expense, partially offset by $0.3 forgiveness of the PPP loan and other income.

Other expense for the nine months ended September 30, 2021 is comprised of approximately $2.4 million of interest expense partially offset by other income and the forgiveness of the PPP loan.

Other expense for the three months ended March 31, 2023 primarily consists of $1.0 million of interest expense and $0.3 million related to contingent loss on early termination of the line of credit with Silicon Valley Bank.

Other expense for the three months ended March 31, 2022 is comprised of $0.6 million associated with the loss on the early redemption of DDH LLC’s previously outstanding Class B Preferred Units and approximately $0.7 million of interest expense.

Interest expense

Interest expense increased for the three months ended September 30, 2022 to $0.9 million compared to $0.8 million for the three months ended September 30, 2021.

The increase in interest expense in the three months period is due to the additional borrowings under

the Term Loan Amendment in July 2022.

Interest expense decreased for the nine months ended September 30, 2022 to $2.3 million compared to $2.4 million for the nine months ended September 30, 2021.

The decrease in year over year interest expense was the result of the refinancing of our debt to a lower interest rate, as well as the redemption of DDH LLC’s Class A Preferred Units in December 2021 and DDH LLC’s Class B Preferred Units in February 2022.

This was partially offset by higher interest on the additional borrowings on the Term Loan in 2022.

Interest expense increased for the three months ended March 31, 2023 to $1.0 million compared to $0.7 million for the three months ended March 31, 2022.

The increase in interest expense in the three months period is due to the additional $4.0 million in borrowings under the Term Loan Amendment in July 2022, as well as higher interest rates.

Liquidity and Capital Resources

The following table summarizes our cash and cash equivalents, working capital, and availability under our Revolving Credit Facility (as defined below) on September 30, 2022 and December 31, 2021:

September 30, 2022

The following table summarizes our cash and cash equivalents, working capital, and availability under our Revolving Credit Facility (as defined below) on March 31, 2023 and December 31, 2022:

March 31, 2023

December 31, 2022

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Working capital

Availability under Revolving Credit Facility

We anticipate funding our operations for the next twelve months using available cash, cash flow generated from operations, and proceeds from our public offering in 2022.

As of September 30, 2022 and December 31, 2021, we had cash and cash equivalents of approximately $7.0 million and $4.7 million, respectively, and as of December 31, 2021 we had $1.8 million available under our Revolving Credit Facility.

On July 26, 2022 we repaid the outstanding balance of $400,000 plus accrued interest and terminated the Revolving Credit Facility as of such date.

We are working with a lender on a line of credit, and expect to finalize the agreement in the fourth quarter of 2022, but there can be no assurance that we will close on such new facility in a timely basis, or at all.

We anticipate funding our operations for the next twelve months using available cash and cash flow generated from operations.

As of March 31, 2023 and December 31, 2022, we had cash and cash equivalents of approximately $6.7 million and $4.0 million, respectively.

We are working with lenders to potentially enter into a new line of credit, and expect to finalize an agreement in the second quarter of 2023, but there can be no assurance that we will close on such new facility in that timeframe, or at all.

Based on our expectations of continued growth in revenue and cash generated from operations in the coming year and the available cash held by us, we believe that we will have sufficient cash resources to finance our operations and service any maturing debt for at least the next twelve months following the issuance of this Quarterly Report on Form 10-Q.

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Our ability to do so will be subject to future economic, financial, business and other factors, many of which are beyond our control.

In conjunction with the acquisition of Orange142 on September 30, 2020, DDH LLC and each of its subsidiaries as co-borrowers entered into a loan and security agreement (the “2020 Term Loan Facility”) with SilverPeak Credit Partners, LP in the amount of $12.825 million, maturing on September 15, 2023.

Interest in year one was 15%, of which 12% was payable monthly and 3% was paid-in-kind (“PIK”).

All accrued but unpaid interest under the 2020 Term Loan Facility was payable in monthly installments on each interest payment date, and we were required to repay the outstanding principal balance on January 15 and July 15 of each calendar year in an amount equal to 37.5% of excess cash flow over the preceding six calendar months until the term loan was paid in full.

The remaining principal balance, and all accrued but unpaid interest was to be due on the maturity date.

The obligations under the 2020 Term Loan Facility were secured by first-priority liens on all or substantially all assets of DDH LLC and its subsidiaries.

The 2020 Term Loan Facility contained a number of financial covenants and customary affirmative covenants.

In addition, the 2020 Term Loan Facility included a number of negative covenants, including (subject to certain exceptions) limitations on (among other things):

indebtedness, liens, investments, acquisitions, dispositions, and restricted payments.

Each of Mark Walker (“Walker”), Chairman of the Board and Chief Executive Officer, and Keith Smith (“Smith”), President, provided limited guarantees of the obligations under the 2020 Term Loan Facility.

The maturity date of the 2020 Term Loan Facility was September 15, 2023;

however, on December 3, 2021, DDH LLC entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square Loan Servicing, LLC (“Lafayette Square”) and used the proceeds to repay and terminate the 2020 Term Loan Facility.

Also in conjunction with the acquisition of Orange142 on September 30, 2020, DDH LLC and each of its subsidiaries as co-borrowers entered into the Revolving Credit Facility that provides for a revolving credit facility with East West Bank in the amount of $4.5 million with an initial availability of $1.0 million.

On December 17, 2021, we amended the Revolving Credit Facility, which increased the availability to $5.0 million with an initial availability of $2.5 million.

The loans under the Revolving Credit Facility bore interest at the LIBOR rate plus 3.5% per annum, and at September 30, 2022 and December 31, 2021, the rate was 0.0% and 7.0%, respectively, with a 0.50% unused line fee.

The maturity date of the Revolving Credit Facility is September 30, 2022, however, on July 26, 2022, the Company repaid the $400,000 that was outstanding pursuant to the Revolving Credit Facility and terminated the Revolving

Credit Facility as of such date.

The Revolving Credit Facility was secured by the trade accounts receivable of DDH LLC and guaranteed by Holdings.

The Revolving Credit Facility includes financial covenants, including that the Company have (i) a minimum fixed charge coverage ratio of not less than 1.25 to 1.00 as of the end of each fiscal quarter, commencing with the fiscal quarter ending September 30, 2020, (ii) a maximum total net leverage ratio of 2.50 to 1.00 for the fiscal quarters ending December 31, 2021 and September 30, 2022, and 2.25 to 1.00 for the fiscal quarters ending thereafter and (iii) a minimum liquidity amount of at least $1.3 million for the period of December 31, 2021 to June 29, 2022 and $1.4 million thereafter.

As of each of September 30, 2022 and December 31, 2021, the Revolving Credit Facility had borrowings outstanding in the amount of $0.0 million, and $1.9 million of unused capacity.

The Revolving Credit Facility contained customary events of default, including with respect to a failure to make payments when due, cross-default and cross-judgment default and certain bankruptcy and insolvency events.

DDH LLC was in compliance with all of its financial covenants under the Revolving Credit Facility and the 2020 Term Loan Facility as of December 31, 2021, and such financial covenants were no longer binding on the Company as of September 30, 2022.

On December 3, 2021, DDH LLC entered into the 2021 Credit Facility with Lafayette Square, as administrative agent, and the various lenders thereto.

The term loan under the 2021 Credit Facility provides for a term loan in the principal amount of up to $32.0 million, consisting of a $22.0 million closing date term loan and an up to $10.0 million delayed draw term loan.

The loans under the 2021 Credit Facility bear interest at LIBOR plus the applicable margin minus any applicable impact discount.

The applicable margin under the 2021 Credit Facility is determined based on the consolidated total net leverage ratio of the Company and its consolidated subsidiaries, at a rate of 6.50% per annum if the consolidated total net leverage ratio is less than 2.00 to 1.00 and up to 9.00% per annum if the consolidated total net leverage ratio is greater than 4.00 to 1.00.

The applicable impact discount under the 2021 Credit Facility is a discount of 0.05% per annum to the extent that DDH LLC adopts certain services intended to improve overall employee satisfaction and retention plus an additional discount of 0.05% per annum to the extent that DDH LLC maintains a B Corp certification by Standards Analysts at the non-profit B Lab (or a successor certification or administrator).

On December 3, 2021, DDH LLC entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square Loan Servicing, LLC (“Lafayette Square”), as administrative agent, and the various lenders thereto.

The loans under the 2021 Credit Facility bear interest at a rate per annum equal to LIBOR plus the applicable margin minus any applicable impact discount.

The applicable margin under the 2021 Credit Facility as amended by the Term Loan Amendment (as defined below) is determined based on the consolidated total net leverage ratio of the Company and its consolidated subsidiaries, at a rate of 7.00% per annum if the consolidated total net leverage ratio is less than 1.00 to 1.00 and up to 10.00% per annum if the consolidated total net leverage ratio is greater than 3.50 to 1.00.

The applicable impact discount under the 2021 Credit Facility is a discount of 0.05% per annum based upon DDH LLC’s

participation in each of certain services intended to improve overall employee satisfaction and retention plus an additional discount of 0.05% per annum to the extent that DDH LLC maintains a B Corp certification by Standards Analysts at the non-profit B Lab (or a successor certification or administrator).

We expect that interest rates applicable to the 2021 Credit Facility will be modified upon the implementation of a LIBOR replacement rate that will apply to our current and future borrowings.

The maturity date of the 2021 Credit Facility is December 3, 2026.

The obligations under the 2021 Credit Facility are secured by senior, first-priority liens on all or substantially all assets of DDH LLC and its subsidiaries and are guaranteed by the subsidiaries of DDH LLC and include a pledge and guarantee by the Company.

The obligations under the 2021 Credit Facility are secured by senior, first-priority liens on all or substantially all assets and property of DDH LLC and its subsidiaries and are guaranteed by the subsidiaries of DDH LLC and include a secured pledge and guarantee by the Company.

The 2021 Credit Facility contains customary events of default, including with respect to a failure to make payments when due, cross-default and cross-judgment default and certain bankruptcy and insolvency events.

The 2021 Credit Facility is subject to an intercreditor agreement pursuant to which the lenders under the Revolving Credit Facility have a priority lien on the trade accounts receivable of DDH LLC and its subsidiaries that constitute eligible accounts under the Revolving Credit Facility and related proceeds, and the lenders under the 2021 Credit Facility have a priority lien on all other collateral.

In connection with the entry into the 2021 Credit Facility, we paid off in full and terminated the 2020 Term Loan Facility.

On July 28, 2022, the Company entered into the Second Amendment and Joinder to Term Loan and Security Agreement (the “Term Loan Amendment”) with DDH LLC, Colossus Media, Huddled Masses, Orange142, USDM, LLC, Lafayette Square, and the Lenders party thereto, pursuant to which the Company was joined as a guarantor of the obligations under the 2021 Credit Facility.

Pursuant to the Term Loan Amendment, DDH LLC will indemnify the Company from and against any claims, losses, expenses and other liabilities incurred by the Company arising from the Company’s guarantor obligations under the 2021 Credit Facility and related term loan documents.

Pursuant to the Term Loan Amendment, DDH LLC will indemnify the Company from and against any claims, losses, costs, charges and other liabilities incurred by the Company arising from the Company’s guarantor obligations under the 2021 Credit Facility and related term loan documents.

Additionally, under the Term Loan Amendment, DDH LLC borrowed $4,260,000 under the Delayed Draw Loan.

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After giving effect to the Delayed Draw Loan on the effective date of the Term Loan Amendment, no additional delayed draw loans will be available under the 2021 Credit Facility.

On July 28, 2022, DDH LLC entered into the Redemption Agreement Amendment with USDM Holdings, Inc.

On July 28, 2022, DDH LLC entered into the Second Amendment to Redemption Agreement with USDM Holdings, Inc.

that amends the previously disclosed Redemption Agreement by and between DDH LLC and USDM Holdings, Inc., dated as of November 14, 2021 (the “Original Redemption Agreement”), as amended by the Amendment to Redemption Agreement dated as of February 15, 2022.

The Redemption Agreement Amendment, among other things, amends the remainder of the principal and interest for the Common Units Redemption Price (as defined in the Original Redemption Agreement) to be $3,998,635.

Pursuant to the terms of the Redemption Agreement Amendment, proceeds of the Delayed Draw Loan were used to repay the outstanding balance and related expenses of the Original Redemption Agreement, as well as other transaction costs.

The Second Amendment to Redemption Agreement, among other things, amends the remainder of the principal and interest for the Common Units Redemption Price (as defined in the Original Redemption Agreement) to be $3,998,635.

Pursuant to the terms of the Term Loan Amendment, proceeds of the Delayed Draw Loan were used to repay in full the outstanding balance and related expenses of the Original Redemption Agreement, as well as other transaction costs.

On January 9, 2023, we entered into the SVB Loan Agreement with Silicon Valley Bank.

The SVB Loan Agreement provided for the SVB Revolving Credit Facility in the original principal amount of $5 million, subject to a borrowing base determined based on eligible accounts, and up to an additional $2.5 million incremental revolving facility subject to the lender’s consent, which would increase the aggregate principal amount of the SVB Revolving Credit Facility to $7.5 million.

Loans under the SVB Revolving Credit Facility were to mature on September 30, 2024, unless the SVB Revolving Credit Facility was otherwise terminated pursuant to the terms of the SVB Loan Agreement.

Borrowings under the SVB Revolving Credit Facility were to bear interest at a floating rate per annum equal to the greater of (i) 6.25% and (ii) the prime rate plus the prime rate margin;

provided, that during the periods when the borrowers have maintained liquidity (as described below) of at least $7,500,000 during the immediately preceding three-month period of time (the “Streamline Period”), the outstanding principal amounts of any advances were to accrue interest at a floating rate per annum equal to the greater of (a) 5.75% and (b) the prime rate plus the prime rate margin.

For purposes of the SVB Loan Agreement, the prime rate was determined by reference to the “prime rate” as published in The Wall Street Journal or any successor publication thereto, and the prime rate margin will be 1.50%;

provided, that during a Streamline Period, the prime rate margin will be 1.00%.

At our option, the Company could at any time have prepaid the outstanding principal balance of the SVB Revolving Credit Facility in whole or in part, without penalty or premium.

Interest on the principal amount of borrowings under the SVB Revolving Credit Facility was payable in arrears on a monthly basis on the last calendar day of each month, on the date of any prepayment of the SVB Revolving Credit Facility and on the maturity date.

The Company was required to maintain compliance at all times with a liquidity covenant requiring us to maintain liquidity of not less than $5 million, where liquidity is defined as the sum of the borrowers’ unrestricted cash and cash equivalents held at Silicon

Valley Bank plus availability under the SVB Revolving Credit Facility.

The SVB Revolving Credit Facility was secured by all or substantially all of the borrowers’ personal property and assets (subject to the limitations expressly set forth in the SVB Loan Agreement).

On March 10, 2023, the California Department of Financial Protection and Innovation closed SVB and appointed the Federal Deposit Insurance Corporation as receiver.

As the Company had not yet drawn any amounts under the SVB Revolving Credit Facility, on March 13, 2023 the Company issued a notice of termination of the SVB Loan Agreement.

Prior to issuing the notice of termination, the Company received a consent to terminate the SVB Revolving Credit Facility and a waiver of the terms relating to the SVB Revolving Credit Facility under the 2021 Credit Facility with Lafayette Square.

Termination of the facility with Silicon Valley Bank became effective April 20, 2023.

The Company did not hold material cash deposits or securities at Silicon Valley Bank and as of the date of this report, has not experienced any adverse impact to its liquidity or to its current and projected business operations, financial condition or results of operations.

Additionally, based on the Company’s expectations of its cash flow from operations and the available cash held by the Company, the Company believes that it will have sufficient cash resources to finance its operations and service any debt obligations for at least the next twelve months.

However, uncertainty remains over liquidity concerns in the financial services industry, and our business, our business partners, or industry as a whole may be adversely impacted in ways that we cannot predict at this time.

Consolidated Statement of Cash Flow Data:

For the Nine Months Ended September 30,

Net cash provided by operating activities

Net cash used in financing activities

Net increase in cash and cash equivalents

For the Three Months Ended March 31,

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Cash Flows Provided by Operating Activities

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In addition, we expect seasonality to impact cash flows from operating activities on a quarterly basis.

For the Nine Months Ended September 30, 2022 and 2021

Cash flows from operating activities increased from $3.2 million provided by operating activities for the nine months ended September 30, 2021 to $3.4 million used in operating activities for the nine months ended September 30, 2022.

The period-over-period increase of $0.2 million was primarily due to a $2.1 million increase in net income and $10.0 million increase related to changes in accounts payable and $1.6 million increase related to changes in accrued liabilities, partially offset by $(13.5) million increase in accounts receivable related to the increase in revenue billings.

For the Three Months Ended March 31, 2023 and 2022

Cash flows from operating activities increased from $0.9 million used in operating activities for the three months ended March 31, 2022 to $3.2 million provided by operating activities for the three months ended March 31, 2023.

The period-over-period increase of $4.0 million was primarily due to a $7.2 million increase for changes in accounts receivable and a $1.3 million increase for changes in deferred revenue related to the increase in revenue and timing of payments received.

This is partially offset by the $0.7 million higher net loss, $3.0 million decrease related to changes in accounts payable and $0.6 million decrease related to the loss on redemption of non-participating preferred units in the prior year.

Cash Flows from Investing Activities

For the Three Months Ended March 31, 2023 and 2022

During the three months ended March 31, 2023, the Company acquired property, equipment and software for $48,212.

Cash Flows Used in Financing Activities

For the Nine Months Ended September 30, 2022 and 2021

Our financing activities consist primarily of proceeds and payments under our notes payable and line of credit, proceeds from government loans, distributions to DDH LLC members, and during 2022, net proceeds from our IPO as well as the redemption payments for DDH LLC’s common units and Class B Units held by USDM Holdings, Inc.

For the Three Months Ended March 31, 2023 and 2022

Our financing activities consist primarily of payments under our notes payable, distributions to DDH LLC members, and during 2022, net proceeds from our IPO as well as the redemption payments for DDH LLC’s common units and Class B Units held by USDM

Holdings, Inc.

Net cash provided by financing activities has been and will be used to finance our operations, including our investment in people and infrastructure, to support our growth.

During the nine months ended September 30, 2022, net cash used in financing activities decreased by $1.1 million, from $(2.2) million used in financing activities for the nine months ended September 30, 2021 to $(1.1) million used in financing activities for the nine months ended September 30, 2022.

During the nine months ended September 30, 2022, we received net proceeds of $11.2 million related to our issuance of Class A common units and used a portion of the proceeds to redeem the common units and Preferred B units held by USDM Holdings, Inc.

During the three months ended March 31, 2023, net cash used in financing activities was higher by $1.0 million, from $0.6 million provided by financing activities for the three months ended March 31, 2022 to $0.4 million used in financing activities for the three months ended March 31, 2023.

During the three months ended March 31, 2023, we made payments on the Revolving Credit Facility of $0.2 million, made payments of $0.2 million in deferred financing costs and had litigation settlement payments of $0.1 million.

During the three months ended March 31, 2022, we received net proceeds of $11.3 million related to our issuance of Class A common stock and used a portion of the proceeds to redeem the common units and Preferred B units held by USDM Holdings, Inc.

for approximately $10.2 million.

We also borrowed $4.3 million under the Delayed Draw Loan during the nine months ended September 20, 2022.

Also, during the nine months ended September 30, 2022, we paid $0.4 million related to the Revolving Credit Facility, paid our quarterly debt obligation on the 2021 Credit Facility of $0.4 million, paid additional deferred financing costs related to 2021 Credit Facility and the Revolving Credit Facility amended in late 2021 of $0.5 million, and members of DDH LLC received tax distributions of $0.9 million.

During the nine months ended September 30, 2021, we paid our scheduled debt obligation on the 2020 Term Loan Facility for $(1.2) million, received $0.3 million from the Paycheck Protection Program loan, and paid $(0.4) million on seller notes and earnouts as well as $(0.9) million to the members for tax distributions.

Also, during the three months ended March 32, 2022, we paid $0.2 million related to the Revolving Credit Facility, paid additional deferred financing costs related to 2021 Credit Facility and the Revolving Credit Facility amended in late 2021 of $0.2 million, and members of DDH LLC received tax distributions of $0.2 million.

Contractual Obligations and Future Cash Requirements

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These leases will require minimum payments of $121,831 in 2023, $110,215 in 2024, $156,077 in 2025, $159,755 in 2026, $163,474 in 2027 and $413,729 thereafter.

We anticipate that the future minimum payments related to our current indebtedness over the next five years will be $163,750 in 2022, $655,000 in 2023, $1.3 million in 2024, $1.3 million in 2025, $1.3 million in 2026 and $21.2 million thereafter, assuming we do not refinance our indebtedness or enter

into a new revolving credit facility.

We anticipate that the future minimum payments related to our current indebtedness over the next five years will be $491,250 in 2023, $1.3 million in 2024, $1.3 million in 2025, $22.4 million in 2026, $3,337 in 2027 and $142,975 thereafter, assuming we do not refinance our indebtedness or enter into a new revolving credit facility.

We believe our cash on hand in addition to our cash generated by operations will be sufficient to cover these obligations as well as the future cash requirements of being a public company.

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In addition to our results determined in accordance with U.S.

generally accepted accounting principles (“GAAP”), including, in particular operating income, net cash provided by operating activities, and net income, we believe that earnings before interest, taxes, depreciation and amortization, as adjusted for acquisition transaction costs, forgiveness of PPP loans, gain from revaluation and settlement of seller notes and earnout liability, loss on early extinguishment of debt, loss on early redemption of non-participating preferred units, and stock-based compensation, (“Adjusted EBITDA”), a non-GAAP measure, is useful in evaluating our operating performance.

generally accepted accounting principles (“GAAP”), including, in particular operating income, net cash provided by operating activities, and net income, we believe that earnings before interest, taxes, depreciation and amortization, as adjusted for contingent loss on early termination of line of credit, loss on early redemption of non-participating preferred units, and stock-based compensation, (“Adjusted EBITDA”), a non-GAAP measure, is useful in evaluating our operating performance.

The most directly comparable GAAP measure to Adjusted EBITDA is net income.

The following table presents a reconciliation of Adjusted EBITDA to net income for each of the periods presented:

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Net Income (Loss) [1]

For the Three Months Ended March 31,

Add back (deduct):

Amortization of intangible assets

Depreciation and amortization of property and equipment

Interest expense

Contingent loss on early termination of line of credit

Stock-based compensation

Forgiveness of PPP loan

Gain on seller earnout revaluation

Loss on early redemption of non-participating preferred units

Adjusted EBITDA

__________________

[1] During the three months ended September 30, 2022, we recorded a one-time severance charge of approximately $502,000.

In addition to operating income and net income, we use Adjusted EBITDA as a measure of operational efficiency.

We believe that this non-GAAP financial measure is useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons:

● Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation and amortization, interest expense, provision for income taxes, stock-based compensation, and certain one-time items such as acquisition transaction costs and gains from settlements or loan forgiveness that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;

forgiveness that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;

● Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance;

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Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the three months ended September 30, 2022, as compared to the critical accounting policies and estimates referred in Part II, Item 7, “Management’s Discussion and

Analysis of Financial Condition and Results of Operations” under “Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2023, as compared to the critical accounting policies and estimates referred in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Recent Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”).

ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's Consolidated Financial Statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the transition away from reference rates expected to be discontinued to alternative reference rates.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):

Scope, to expand the scope of this guidance to include derivatives.

The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022.

Management is currently evaluating the impact of this update but does not expect it to have a material impact on the Company’s financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers.

This ASU should be applied prospectively to acquisitions occurring on or after the effective date of December 15, 2022, and early adoption is permitted.

This update is not expected to have a material impact on the Company’s financial statements.

See Note 2 to our consolidated financial statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis